What is Project Financing?

Abstract

Project financing can be traced back to the medieval times¹ when in the 12^th century the British Crown negotiated with Frescobaldi (an Italian merchant bank of that time) a loan for the development of the Devon silver mines on the basis of a production payment loan structure.² In the 19^th century, many infrastructure projects were financed using project financing techniques, such as railways in Argentina (1860) and India (1880) and the Suez Canal (1850). However, project financing as a sophisticated modern financing technique started to be actively used in early 1970s, as a result of the international banking crisis of 1974 that caused a dramatic change in the international financial markets and in the ways of financing infrastructure and other types of projects.³ In fact, the modern version of limited-recourse project financing was first pioneered in the early 1970s for developing the North Sea oil fields. Since then, project financing has been increasingly used as a tool for financing large, capital-intensive projects.